How Exactly Do Movies Make Money?

From afar, the movie business might look pretty glamorous. Celebrities and producers glide down red carpets, clutch their Oscars and vacation in St. Bart’s… just because they can. While there's a lot of money to be made in the film industry, the economics of movie making are far from simple.

Something you’ll likely hear if you walk through the halls of any movie studio is, “nobody knows anything.” And it’s true. The public can be fickle, the industry is in flux, and any movie is an extremely risky investment, even a film starring big names. According to the Motion Picture Association of America’s (MPAA) Theatrical Market Statistics for 2016, U.S. and Canadian box office was $11.4 billion a 2% improvement from 2015. Globally the box office for films hit $38.6 billion in 2016.

It’s nowhere as straightforward as the early days of cinema when a movie would come out in theaters, make the vast majority of its revenues via ticket sales, and then essentially disappear. Major studios and indie filmmakers alike now spend much of their days looking for new sources of revenue, because ticket sales are no longer the be-all and end-all for films.

First, the Budgets

In general, major studios don’t disclose the full budgets for their films (production, development, and marketing/advertising). This is in part because it costs far more to make and market a film than it seems. For example, the production budget for Marvel’s "The Avengers" is recorded as $220 million, but if you factor in marketing and advertising costs, that number spikes. (For more, read: What Drives Summer Blockbuster Movie Profits?)

Indeed, for many films, the Print & Advertising (P&A) costs alone can be extremely high. A $15 million film (which, funnily enough, is considered a small budget film in Hollywood) might have a promotional budget that's higher than its production budget. This is because films that don’t have a built-in audience (like those based on bestselling books like “The Hunger Games” or even “50 Shades of Grey”) need to get people into the theater. Romantic comedies or some children's films need to promote themselves via billboards, TV commercials and subway ads, and those costs add up quickly. For a film budgeted between $40 and $75 million, its P&A budget might be $20 million.

For any type of film, whether a blockbuster or an indie production, things like tax incentives and revenues from product placements can help pay down the budget. If they're given an incentive to shoot a film in Canada or Louisiana or Georgia, producers will usually hustle to do so.

Going back to the “nobody knows anything” mantra, occasionally there are surprise hits like the indie “Little Miss Sunshine,” which is a Cinderella story when it comes to film finance. Its budget was around $8 million, it sold to distributor Fox Searchlight for $10.5 million at the Sundance Film Festival, and it made $59.89 million in U.S. theaters, which is almost unheard-of for an indie. By contrast, you have the Walt Disney Co. (DIS) movie "John Carter," which had an estimated budget of $250 million, but only made $73 million at the U.S. box office.

So there's no sure path for a film to turn a profit since factors like brand awareness, P&A budgets and the desires of a fickle public come into play. Still, there are a few tried and true ways that films can attempt to make money.

Ticket Prices

Theater attendance has been falling, which makes it even harder for studios and distributors to profit from films. Usually, a portion of theater ticket sales goes to theater owners, with the studio and/or distributor getting the remaining percentage. Traditionally, during the opening weekend of a film, the larger chunk went to the studio, while as the weeks went on, the exhibitor's percentage rose. So a studio might make 50% of a film's ticket sales in the U.S. and even less than that on overseas ticket sales.

The percentage of revenues an exhibitor gets depends on the contract for each film. Many contracts are intended to help a theater hedge against films that flop at the box office by giving theaters a larger cut of ticket sales for such films, so a deal may have the studio getting a smaller percentage of a poorly-performing film and a larger percentage of a hit film's take. (You can see the securities filings for large theater chains to see how much of their ticket revenue goes back to the studios.) Studios and distributors generally make more from domestic revenue than from overseas sales because they get a larger percentage. Still, overseas ticket sales are incredibly important, especially today. It's why you’re seeing more sci-fi, action, and fantasy films, and why superhero movies are such a phenomenon: They’re easy to understand, whether you’re in Malaysia or Montana. It’s much harder for an indie comedy to translate.

Merchandising

It all started with “Star Wars.” Since the first George Lucas-helmed movie premiered back in 1977, the franchise has made over $12 billion in revenue from toy licensing alone (for more, read: How Netflix Pays for Movie and TV Show Licensing). In 2015, "Star Wars: The Force Awakens" brought in $700 million in retail sales. And global merchandising sales rose by 4.2% to $251.7 billion in 2015 according to a 2016 study by the International Licensing Industry Merchandisers' Association.

This strategy obviously doesn't work for every film (action figures for a comedy like Amy Schumer’s “Trainwreck” probably wouldn’t bring in billions), but for big-budget films that appeal to kids and Comic-Con junkies alike, merchandising is a cash cow. See Disney’s “Toy Story” franchise, which has brought in about $2.4 billion in retail sales.

Foreign Sales

When a producer cobbles together the budget for an independent film modestly budgeted at, say, $25 million, selling the distribution rights in foreign territories is crucial to cover the film’s budget and, hopefully, bring in revenue. Independent filmmakers can actually make money if they have a great foreign sales agent who can sell their film in key overseas markets.

Oftentimes, producers will make their “wish list” when casting their film, and the list will typically be full of well-known names that “travel” overseas. If you have Tom Cruise or Jennifer Lawrence as your star, you’re much more likely to sell the rights to China and France. This isn’t a guarantee that your film will make millions (or billions) but it's about as safe a bet as you can get in this business.

DVD/TV/Streaming Rights/VOD

Once upon a time, it was all about DVD sales. Now, it’s far more about Video On Demand (VOD), television rights and streaming rights. (For more, read: The Future of the Television Industry.)

For some producers, selling pay-TV and international rights is a big source of profit because the producer doesn’t have to pay for marketing and P&A costs. Films have to leave the theater at some point, but they can remain evergreen on TV. How many times have you flipped through channels and come across “The Notebook” or “The Devil Wears Prada” yet again? There's also money to be made 32,000 feet in the air: airlines pay hefty sums for in-flight entertainment.

As for VOD, revenue from these deals should add hundreds of millions to a studio's bottom line. For indie films, there are several VOD release strategies: day-and-date (movies released simultaneously in theaters and VOD), day-before-date (VOD before theatrical) and VOD-only. So movies that don’t have the special effects and big-name stars to lure people to the theater often profit from this model.

And while the DVD market may have slowed dramatically, it’s not a lost cause—at least, for some films. “The Hunger Games” sold 3.8 million copies in its first weekend on DVD/Blu-Ray, so if a property is branded or has a huge built-in audience, DVD/Blu-Ray sales still could be robust.

The Bottom Line

As the saying goes, nobody knows anything in Hollywood. The film industry is in flux, and ticket sales alone don't drive revenue. There’s merchandising, VOD sales, foreign sales and a plethora of other distribution channels that can help filmmakers, producers, and studios turn a profit. So who knows, the little indie that you invest in could just be the next “Little Miss Sunshine.” Or not. In Hollywood, there are no guarantees.